PHILADELPHIA (AP) — A suburban Philadelphia school system that threatened to shut down due to lack of funds should be able to stay open if a third party oversees the district’s financial operations for the rest of the academic year, state education officials say.

An executor is needed because the Chester Upland School District’s fiscal records are in “complete disarray,” and officials there cannot be trusted to spend upcoming state subsidies on essential items, according to a report from Education Secretary Ronald Tomalis.

Chester Upland is among the poorest school districts in Pennsylvania and gets about 70 percent of its budget from the state. It threatened to shut down in January because it had run out of funds, and district officials filed a federal lawsuit to force the state to send more money.

On Jan. 17, a federal judge ordered the state to provide stopgap funding. He also ordered Tomalis to submit a report and recommendation for allocating the remainder of the district’s $70 million public appropriation. The secretary filed the proposal late Monday.

Chester Upland’s deputy acting superintendent, Thomas Persing, said he and other members of a new administrative team have been working to improve the district’s financial management. Persing came to the district in November.

“We welcome a third party to come in, quite frankly because that gives another set of eyes to look at the situation and improve,” Persing said.

He noted, though, that the state already placed a financial liaison in the district several months ago. District spokesman Joel Avery later said officials would welcome advice but did not favor the idea of a third party with spending authority.

Tomalis’ 35-page report describes an almost irretrievably broken system of managing district finances and personnel, including a payroll with 54 questionable or unverified employees. One consultant “could not recall another school district whose business office was in such poor shape in terms of lack of documentation, internal controls and infrastructure,” the document said.

The district has been financially distressed for years, and operated under state oversight until July 2010, when it reverted to governance by an elected school board.

Since then, the report said Chester Upland “adopted the strategy of failing to pay the district’s known financial obligations, redirecting those funds to pay other expenses that were less essential.” This was apparently a conscious decision to force the state to funnel in more money “to avoid a catastrophic shutdown,” according to the report.

The report then delineates a spending schedule for items including payroll and vendors that it recommends be carried out by a third party. The proposal still requires judicial approval.

“The amounts identified … cannot simply be released into the district’s hands,” the report said. “If this were to happen … the existing crisis could simply repeat itself, with (Chester Upland) again running out of money to operate its schools for the rest of the year.”

But the report also noted part of Chester Upland’s problems stem from the state formula for paying charter schools — alternative public schools that are approved by local school districts, but operate independently from them. About half of Chester Upland’s 6,800 students attend charters.

Districts pay charter schools a per-pupil rate based on their revenue from the previous year. So while Chester Upland’s budget was reduced from $114 million last year to $96 million this year — partly due to statewide funding cuts — it paid charters based on its $114 million budget.

The report also questioned what it described as excessive management fees charged by one charter school, as well as the state-set rate for special needs students attending charters.

Charter schools get an extra $14,500 per special needs pupil, which the report said gives the schools a financial incentive “to diagnose students as having borderline speech or language disabilities.”

The Pennsylvania State Education Association, the state’s largest teachers union, and two other advocacy groups on Friday filed a federal civil rights complaint last week on the same issue.

The groups contend the state formula makes it so expensive to educate special needs students at charters that it shortchanges the 700 special needs students served by Chester Upland’s district schools.

In a related development Tuesday, state Sen. Jeffrey Piccola, R-Dauphin, introduced a bill that would create a special office within the Education Department to deal with financially distressed districts.

The legislation was spurred in part by the problems in Chester Upland, as well as in other fiscally troubled districts such as Harrisburg, Steelton-Highspire, Duquesne and York.